DOL Won't Enforce Rules Limiting 401(k) Plans' Use of Nonfinancial Factors

March 13, 2021

​The U.S. Department of Labor (DOL) announced it will not enforce a rule finalized last November under the Trump administration that limited fiduciaries use of nonfinancial factors—such as environmental, social and governance (ESG) criteria—when choosing mutual funds, corporate equities and other retirement plan investments.

The DOL is also tabling enforcement of a related rule that stopped fiduciaries from casting corporate-shareholder proxy votes in favor of social or political positions that don't advance the financial interests of retirement plan participants.

"Until it publishes further guidance, the Department will not enforce either final rule or otherwise pursue enforcement actions against any plan fiduciary based on a failure to comply with those final rules," the DOL announced on March 10. The department said it will continue to enforce fiduciaries' duties to make prudent decisions on behalf of plan participants as required by the Employee Retirement Income Security Act (ERISA).

"These rules have
created a perception that fiduciaries are at risk if they include any environmental, social and governance factors in the financial evaluation of plan investments, and that they may need to have special justifications for even ordinary exercises of shareholder rights," said Ali Khawar, principal deputy assistant secretary for the DOL's Employee Benefits Security Administration.

He added, "We intend to conduct significantly more stakeholder outreach to determine how to craft rules that better recognize the important role that environmental, social and governance integration can play in the evaluation and management of plan investments, while continuing to uphold fundamental fiduciary obligations."

The DOL's announcement "signals the end of the DOL's current enforcement effort around ESG usage by ERISA plans," blogged attorneys at Morgan Lewis. "This may be a sign that the Biden DOL will prepare a new set of rulemaking in the areas of ESG and proxy voting that replaces or modifies the Trump era rules."


Reviewing the Basics: What Are ESG Investments?

ESG or "socially responsible" mutual funds invest in companies that meet the fund managers' criteria for environmental stewardship, social justice and fund governance. Some ESG funds exclude the stock of tobacco, fossil fuel, firearm and defense companies, and firms that are opposed to union organizing or that pay excessive executive compensation. They may favor companies that use renewable resources and are committed to gender equality, diversity and community engagement.

Weighing ESG Factors

The Trump-adminstration rule,
Financial Factors in Selecting Plan Investments, barred fiduciaries from taking on additional investment risks to promote nonfinancial goals, for instance.

The top-ranking Republicans on the House Education and Labor committees last year, Reps. Virginia Foxx, R-N.C., and Tim Walberg, R-Mich., said the final rule "clarifies how retirement plan fiduciaries can meet their legal obligations to serve retirement savers exclusively, free from potential ulterior motives."

Supporters of the rule also pointed to
a research paper from the Center for Retirement Research at Boston College. It concluded, "the evidence suggests, however, that social investing: 1) yields lower returns; and, 2) is not effective at achieving social goals."

Among the rule's opponents, Lisa Woll, CEO of the nonprofit US SIF: The Forum for Sustainable and Responsible Investment in Washington, D.C., criticized it for putting "a substantial burden on fiduciaries who consider ESG factors in their retirement plans, requiring additional documentation to justify why ESG factors are financially material." She said that "abundant data debunks the premise that utilization of ESG criteria is problematic."

Mindy Lubber, CEO and president of sustainability organization Ceres, called the rule "another harmful action by the Trump administration, at a time when the global climate crisis looms large as another systemic risk upending lives, livelihoods, and causing deadly devastation and damage."

Voting on Shareholder Measures

The suspended proxy voting rule,
Fiduciary Duties Regarding Proxy Voting and Shareholder Rights, limited plan fiduciaries from casting corporate-shareholder proxy votes, based on stock holdings in the retirement plans they oversee, in favor of social or political positions that didn't advance the financial interests of retirement plan participants.

Instead, proxy voting decisions and other exercises of shareholder rights had to be solely in the interest of, and for the exclusive purpose of, providing benefits to plan participants and beneficiaries.

Unions have been critical of the rule. The United Food and Commercial Workers International Union, for instance, wrote in a comment letter that the regulation would "create an overly burdensome and unjustified process for the consideration of voting proxies" on behalf of union-supported shareholder ballot measures.

According to the Service Employees International Union, proxy voting by retirement plan fiduciaries "reflects appropriate monitoring and engagement efforts by institutional investors ... and
the growing recognition that the environment, diversity, and other societal issues present economic risks and opportunities."

Commenting on behalf of the proxy rule, Chris Burnham, president of the Institute for Pension Fund Integrity, which advocates for transparency and accountability in the management of public pension plans, said that reforms to the current proxy advisory system were needed "because decision-making has increasingly become subject to political pressure and personal influence."


Related SHRM Articles:


Biden DOL Allows Investment Advice Rule to Take Effect,
SHRM Online, February 2021


Biden Administration to Review Rules for Employee Health and Retirement Plans,
SHRM Online, January 2021


DOL Final Rule Limits Proxy Voting by Retirement Plan Fiduciaries,
SHRM Online, December 2020


Final Rule Limits 401(k)s from Picking Funds Based on Nonfinancial Factors,
SHRM Online, November 2020